nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒06‒14
twenty-two papers chosen by
Russell Pittman
United States Department of Justice

  1. Vertical Integration and Downstream Collusion By Sara Biancini; David Ettinger
  2. Entry Games and Free Entry Equilibria By Michele Polo
  3. Tacit collusion and market concentration under network effects By Rupayan Pal; Marcella Scrimitore
  4. Exclusive dealing with costly rent extraction By Calzolari, Giacomo; Denicolò, Vincenzo; Zanchettin, Piercarlo
  5. Information Exchanges among Firms and Their Welfare Implications (Part ‡U): Alternative Duopoly Models with Different Types of Risks By Yasuhiro Sakai
  6. Monopoly Power and Endogenous Product Variety: Distortions and Remedies By Bilbiie, Florin Ovidiu; Ghironi, Fabio; Melitz, Marc J
  7. Dynamic pricing with reference price dependence By Chenavaz, Régis
  8. An Economic Policy Perspective on Online Platforms By Bertin Martens
  9. Competing eco-labels and product market competition By Li, Yi
  10. Switching costs and financial stability By Stenbacka, Rune; Takalo, Tuomas
  11. Bank competition, financial dependence, and economic growth in the gulf cooperation council By Caggiano,Giovanni; Calice,Pietro
  12. Can non-alcoholic beer be a substitute for beer? Evidence from differentiated product demand model estimation using scanner data By Nakajima, Toru
  13. The effects of banning advertising in junk food markets By Dubois, Pierre; Griffith, Rachel; O'Connell, Martin
  14. A Theoretical Analysis of Multiproduct Mergers: Application in the Major Meat Sectors By Sanderson, Benjamin L; Coatney, Kalyn T; Parman, Bryon J; Tack, Jesse B
  15. Innovation Led Alliances: Theory and application to the GM Plant Industry By Rousselière, Samira; Rousselière, Damien; Ramani, Shyama
  16. The Great Recession and Vertical Price Transmission in the U.S Beef Market By Darbandi, Elham; Saghaian, Sayed
  17. Demand for Niche Local Brands in the Fluid Milk Sector By Liu, Yizao; Rabinowitz, Adam; Chen, Xuan; Campbell, Benjamin
  18. Food Price, Firm Productivity and Market Structure in Indonesian Food and Beverages Industry By He, Xi
  19. Scoring rule auctions and favoritism: an empirical study on Italian public procurement for canteens By Riccardo Camboni Marchi Adani
  20. Regulating from the Demand Side: Public Health Insurance with Monopolistically Competitive Providers and Optional Spot Sales By Gilad Sorek; Randolph T. Beard
  21. The Variety of Related Variety Studies: Opening the Black Box of Technological Relatedness via Analysis of Inter-firm R&D Cooperative Projects By Ji?í Blažek; David Marek; Viktor Kv?to?
  22. Strategic investment, multimarket interaction and competitive advantage: An application to the natural gas industry By Robert A. Ritz

  1. By: Sara Biancini (Normandie Université, UNICAEN, CREM CNRS, France); David Ettinger (Paris Dauphine, PSL, LEDa and CEREMADE, France)
    Abstract: We investigate the effect of a vertical merger on downstream firms' ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the total collusive profits, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal cost, faces higher profits in the deviation phase and in the non cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated firm, while optimal punishment erases the difficulty related to the asymmetries in the non cooperative state. As a result, vertical integration generally favors collusion.
    Keywords: Vertical Integration, Tacit Collusion
    JEL: D43 L13 L40 L42
    Date: 2016–05
  2. By: Michele Polo
    Abstract: This Chapter reviews the theoretical liteature on entry games and free entry equilibria. We show that a wide range of symmetric oligopoly models share common comparative statics properties. Individual profits and quantities decrease in the number of firms, and tend to competitive or monopolistic competitive equilibria when the number of firms increases indefinitely. The maximum number of firms sustainable in a symmetric long run equilibrium depends on technology (economies of scale), preferences (market size) and strategies (toughness of price competition). On the normative side, in homogeneous product markets the business stealing effect drives the result of excessive entry, whereas adding product differentiation and the utillity from variety may revert the result. We then consider asymmetric free entry equilibria that exploit the aggregative nature of many oligopoly models. Finally, we discuss endogenous sunk costs and persistent concentration and frictionless entry and contestable markets.
    Keywords: Entry, Free entry equilibria, endogenous and exogsnous sunk costs, contestable markets
    JEL: L1 L13 D43
    Date: 2015
  3. By: Rupayan Pal (Indira Gandhi Institute of Development Research); Marcella Scrimitore (University of Salenta)
    Abstract: In an infnitely repeated Cournot game with trigger strategy punishment, we demonstrate that the relationship between market concentration and collusion sustainability depends on the strength of network externalities. The latter is shown to interact with the number of firms and to affect the profitability of cooperation vs. competition, which delivers the result, challenging conventional wisdom, that lower market concentration can make collusion more stable.
    Keywords: Collusion, market concentration, network ekects
    JEL: L13 L14 L41
    Date: 2016–04
  4. By: Calzolari, Giacomo; Denicolò, Vincenzo; Zanchettin, Piercarlo
    Abstract: We analyze the impact of exclusive contracts on the intensity of competition among firms that supply substitute products. Exclusive contracts would be neutral if firms priced at marginal cost and extracted buyers' rent by means of non distortionary fixed fees. We focus instead on the case in which rent extraction is costly, and hence firms distort marginal prices upwards. We show that in this case exclusive contracts are anti-competitive when the dominant firm enjoys a large enough competitive advantage over its rivals, and are pro-competitive, or neutral, when the competitive advantage is small. These effects appear as soon as marginal prices are distorted upwards, irrespective of which specific factors impede perfect rent extraction.
    Keywords: Antitrust; Dominant firm; Exclusive dealing; Rent extraction
    JEL: D42 D82 L42
    Date: 2016–05
  5. By: Yasuhiro Sakai (Faculty of Economics, Shiga University)
    Abstract: The purpose of this paper is to overview and evaluate the problem of information exchanges in oligopoly, an important topic in contemporary economics. It is intended as a synthesis of the two streams of economic theories, the economics of imperfect competition and the economics of risk and information. This long series of papers consist of three parts. The previous paper, which dealt with Part I, discussed the dual relations between the Cournot and Bertrand duopoly models in the absence of risk. This paper turns to Part II, focusing on many duopoly models in which a common risk is present. The starting point of discussion is the Cournot duopoly model with an industry-wide common demand risk. Many other duopoly models such as the Cournot duopoly with cost risk and the Bertrand duopoly with demand or cost risk are successively discussed. It will be seen that the existence of various risk factors and the informational exchanges between Cournot or Bertrand firms influence the welfare implications on consumers and the society in many complicated ways. The next paper which deals with Part III will be concerned with more complicated problems such as private risks and/or oligopoly models.
    Keywords: Duopoly ECournot,Bertrand,common risk,information exchanges
    Date: 2016–05
  6. By: Bilbiie, Florin Ovidiu; Ghironi, Fabio; Melitz, Marc J
    Abstract: The inefficiencies related to endogenous product creation and variety under monopolistic competition are two-fold: one static---the misalignment between consumers and producers regarding the value of a new variety; and one dynamic---time variation in markups. Quantitatively, the welfare costs of the former are potentially very large relative to the latter. For a calibrated version of our model with these distortions, their total cost amounts to 2 percent of consumption. Appropriate taxation schemes can implement the optimum amount of entry and variety. Elastic labor introduces a further distortion that should be corrected by subsidizing labor at a rate equal to the markup for goods, in order to preserve profit margins and hence entry incentives.
    Keywords: efficiency; Entry; Monopoly power; Optimal fiscal policy; Product creation; Variety; Welfare costs
    JEL: D42 D50 E60 H21 H32 L16
    Date: 2016–05
  7. By: Chenavaz, Régis
    Abstract: A firm usually sets the selling price of a product by taking into account consumers' reference price. A behavioral pricing scheme integrating reference effects would suggest that the higher the reference price, the higher the firm can set the price. In this paper, the author investigates this intuition by accounting for reference dependence in an optimal control framework. Results show that the dynamics of price originates from the sensitivity of customers to reference price. Contrary to intuition, price dynamics is not systematically associated to the evolution of the reference price, but derives from competing effects related to the dynamics of the reference price.
    Keywords: dynamic pricing,behavioral pricing,reference dependence,optimal control
    JEL: C61 M21 D03
    Date: 2016
  8. By: Bertin Martens (European Commission – JRC - IPTS)
    Abstract: This report provides an overview of the relevant economic research literature on platforms or multi-sided online markets. It discusses platforms from a regulatory policy angle, including potential market failures in platforms, the extent of self-regulation and possible regulatory responses through existing competition policy, consumer protection and data protection instruments. It covers selected policy issues associated with these platforms including possible sources of bias in search engines and search rankings, data protection and the use of personal data in platforms, and platform liabilities within and beyond the e-commerce directive.
    Keywords: multi-sided markets, digital online platforms, market failure, regulation, e-commerce directive, search engines, data protection, intermediary liabilities
    JEL: F15
    Date: 2016–05
  9. By: Li, Yi
    Abstract: I analyze a green product market in which eco-labeling programs compete—programs certifying the environmental quality of the product to their respective standards. Specifically, I examine the strategic competition between an industry-sponsored program and a program sponsored by nongovernmental organization (NGO) in a duopoly product market where eco-labels are strategic variables for firms. In particular, I analyze the effects of such eco-label competition on environmental benefit and social welfare. I show that the eco-label competition may generate the same environmental benefit and generally increase social welfare relative to a single NGO label.
    Keywords: Label-competition, Duopoly, Credence goods, Vertical product differentiation, Agricultural and Food Policy, Environmental Economics and Policy, Industrial Organization, Public Economics, Q18, Q58, L13, L15,
    Date: 2016
  10. By: Stenbacka, Rune; Takalo, Tuomas
    Abstract: We establish that the effect of intensified deposit market competition, measured by reduced switching costs, on the probability of bank failures depends critically on whether we focus on competition with established customer relationships or competition for the formation of such relationships. With inherited customer relationships, intensified competition (i.e., lower switching costs) destabilizes the banking market, whereas it stabilizes the banking market if we shift our focus to competition for the formation of customer relationships. These findings imply that the proportion between new and locked-in depositors is decisively important when determining whether intensified competition destabilizes the banking market or not.
    Keywords: deposit market competition, financial stability, bank failures, switching cost, competition versus stability tradeoff
    JEL: G21 D43
    Date: 2016–03–01
  11. By: Caggiano,Giovanni; Calice,Pietro
    Abstract: The relationship between bank competition, firm access to finance, and economic growth is a much debated topic in the economic literature and in policy circles. This paper uses a panel of 23 manufacturing sectors over 2002-10 to investigate the impact of bank competition on industry growth in the Gulf Cooperation Council economies. The results show that greater competition allows financially dependent firms to grow faster. In addition, the results show that lower restrictions on banks? permissible activities, better credit information, and greater institutional effectiveness mitigate the damaging impact of low competition. These results are robust to a variety of checks. The findings suggest that improving bank competition should be an important aspect of the financial sector development agenda in the Gulf Cooperation Council.
    Keywords: Debt Markets,Banks&Banking Reform,Access to Finance,Labor Policies,Emerging Markets
    Date: 2016–05–31
  12. By: Nakajima, Toru
    Abstract: Non-alcoholic (NA) beer, a beverage that tastes like beer and contains no/little alcohol, has seen growing world-wide popularity as a potential substitute of beer. To elucidate consumer demand and profitability of NA beer, this study estimated price elasticities and price-cost margins of beer and NA beer at brand level in the case of Japan, using a structural demand model of differentiated products and a purchase data scanned by 30,000 consumers. According to the empirical result, NA beer demand is responsive to prices of some regular and premium beer brands as well as NA beer brands while beer demand is not responsive to NA beer prices. This implies that (1) some consumers of regular and premium beers consider NA beer as a substitute although NA beer consumers do not recognize beer as a replacement; (2) although low-malt, new-genre (alcoholic drinks with beer-like taste), and NA beers have some common product characteristics, consumers of low-malt and new-genre beers have different preference from that of NA beer consumers; (3) unless prices of NA beer brands increase, certain amount of demand for NA beer can be expected to remain irrespective of price levels of beer brands. Price-cost margins of producing NA beer were found to be similar to those of regular and new-genre beers while price-cost margins for premium beer were small and those for low-malt beer were large.
    Keywords: Non-alcoholic beer, consumer demand, price-cost margin, product differentiation, the BLP model, Agribusiness, Demand and Price Analysis, Industrial Organization, Marketing,
    Date: 2016
  13. By: Dubois, Pierre; Griffith, Rachel; O'Connell, Martin
    Abstract: There are growing calls to restrict advertising of junk foods. Whether such a move will improve diet quality will depend on how advertising shifts consumer demands and how firms respond. We study an important and typical junk food market { the potato chips market. We exploit consumer level exposure to adverts to estimate demand, allowing advertising to potentially shift the weight consumers place on product healthiness, tilt demand curves, have dynamic effects and spillover effects across brands. We simulate the impact of a ban and show that the potential health benefits are partially offset by firms lowering prices and by consumer switching to other junk foods.
    Keywords: advertising, demand estimation, dynamic oligopoly, welfare
    JEL: L13 M37
    Date: 2016–05
  14. By: Sanderson, Benjamin L; Coatney, Kalyn T; Parman, Bryon J; Tack, Jesse B
    Abstract: This paper develops a theoretical model applicable to mergers with differentiated products, with an application in the meat sector. Results show that mergers across submarkets may raise competitive concerns if sufficient economies of scope are not gained by the merger.
    Keywords: merger analysis, industrial organization, meat industry, beef, pork, chicken, Demand and Price Analysis, Industrial Organization, Livestock Production/Industries,
    Date: 2016
  15. By: Rousselière, Samira; Rousselière, Damien; Ramani, Shyama
    Abstract: The objective of the present paper is to identify the determinants of the form of collaboration initiated between an upstream innovator and a downstream producer in order to incorporate a new input and commercialize an innovation consisting of a quality enhanced final product, with an empirical application to the GM plant industry. The choice of upstream firm between license, joint venture, merger or a subsidiary is modeled as a function of three parameters: degree of quality improvement engendered by the new input, the market share of the downstream producer and the capability of the downstream producer to incorporate the new input and commercialize it successfully. We also discuss the case where the downstream firm is a cooperative.
    Keywords: biotechnology, cooperative, GMO, innovation, intellectual property, merger, joint venture, license, subsidiary, Agribusiness, Industrial Organization, Research and Development/Tech Change/Emerging Technologies, D20, D45, L10, L65, Q13,
    Date: 2016
  16. By: Darbandi, Elham; Saghaian, Sayed
    Abstract: This study analyses the price adjustment of the U.S beef sector using monthly prices of the farm, wholesale and retail levels for the period of 1970-2014. The objectives are to investigate both speed and magnitude of price adjustment. To this purpose, the Vector Error Correction Model (VECM) and historical decomposition graphs are applied. The results indicate that retail prices have lower speed of adjustment than wholesale prices. Also, the magnitude of price adjustment in the presence of the Great Recession shock, as an exogenous shock, is different for each level of the U.S. beef marketing chain such that wholesale prices show a higher magnitude of price adjustment toward the long-run equilibrium. Finally, it is concluded that with respect to both speed and magnitude of the price adjustment, the U.S. beef sector has asymmetric price adjustment, pointing to inefficiency of the U.S. beef supply chain. These results have welfare implications for the U.S. beef consumers and producers.
    Keywords: Price analysis, the U.S. Beef Market, Historical Decomposition, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, Livestock Production/Industries, Q11, Q13,
    Date: 2016
  17. By: Liu, Yizao; Rabinowitz, Adam; Chen, Xuan; Campbell, Benjamin
    Keywords: Agribusiness, Consumer/Household Economics, Demand and Price Analysis,
    Date: 2016
  18. By: He, Xi
    Keywords: Food Security and Poverty, Industrial Organization,
    Date: 2016–05–25
  19. By: Riccardo Camboni Marchi Adani (Department of Economics (University of Verona))
    Abstract: We built an original dataset of 307 auctions aimed at awarding canteen services in Italy; it contains scoring rules, first price, and average bid mechanisms. We exploit this dataset to test the degree of competitiveness and the presence of favoritism by public contracting authorities (CAs) towards a possibly predetermined bidder. We start with a working hypothesis: a presumption of which auctions were competitive; we then run an econometric test and construct a variable that individuates possible non-competitive behaviors. Our results highlight that scoring rules can be distorted to favor a bidder, and the victory of the incumbent is associated with lower competition, which is a sign of favoritism.
    Date: 2016–05
  20. By: Gilad Sorek; Randolph T. Beard
    Abstract: We study the implications of extending public-insurance coverage to an existing medical market in Salop’s spatial model of imperfect competition. In this setup a public insurer sets a price to medical providers, which must maintain their reservation pro.t from selling on the spot market directly to consumers. We show that the public insurer can manipulate this reservation profit by setting the coinsurance rate, and that setting the coinsurance rate properly yields the market first best product diversification. The results survive generalizations including moral hazard and incomplete coverage. When adding quality choice to the analysis, a minimum quality standard that is combined with a proper coinsurance rate can still support market efficiency.
    Keywords: Public-Insurance; Spatial Monopolistic Competition; Market Efficiency; Regulation
    Date: 2016–04
  21. By: Ji?í Blažek; David Marek; Viktor Kv?to?
    Abstract: The aim of this article is twofold. First, on the basis of a review of recent literature on related variety, it shows that there are not only differences between ex-ante and ex-post conceptualisations of relatedness, but also several striking methodological differences within this research stream. Therefore, it is argued, the growing number of studies on relatedness using different conceptualisations and methodologies can result in a “hollowing-out” of the original explanatory power of the concept. Second, this paper aims to open the black box of relatedness among industries by exploring one of the main channels through which the effects of relatedness can operate by simultaneous application of both ex-ante and ex-post approaches to measuring relatedness. In particular, joint R&D projects among companies represent a vigorous mechanism of knowledge exchange and mutual learning, but, as of yet, these studies have not been systematically linked to the concept of related variety. Our results prove that R&D collaboration according to technological distance is indeed far from random, but, contrary to our expectation, the results show that R&D collaboration occurs most frequently among unrelated companies. Thus, the search for partners in R&D projects seems to be driven by the novelty of knowledge rather than by probabilities of its comprehension. Conceptually, these findings suggest that in reality there might be various processes that require vastly different level of relatedness. This could lead to important policy implications as overreliance upon support for related industries might be misleading.
    Keywords: related variety, inter-firm collaboration, research and development, Czechia
    JEL: R11 O14
    Date: 2016–05
  22. By: Robert A. Ritz
    Abstract: This paper presents a game-theoretic analysis of multimarket competition with strategic capacity investments, motivated by recent developments in international natural gas markets. It studies the competitive implications of heterogeneity in firm structure arising from asset specificity. A single-market focus confers advantage even in the absence of superior value or cost. Lower costs and a sharper organizational focus are self-enforcing in generating competitive advantage. This establishes a novel connection between two of Porter’s “generic strategies”. The model speaks to competition between pipeline gas and liquefied natural gas (LNG) and the global impacts of the Fukushima nuclear accident.
    Keywords: Competitive advantage, strategic commitment, generic strategies, cost pass-through, value capture
    Date: 2016–01–12

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